USDCAD--am I trying to be contrarian?

There’s much to write about this morning. But I thought I’d stay with USDCAD since the USD is so reviled right now. Then too, as everyone knows, there’s an inverse relationship between commodity prices and the USD—if commodity prices rise the buck goes down. CAD (the Loonie) is a commodity currency. So the sensible position is to short USDCAD.

Yesterday I wrote that I bought, not sold, the pair at 1.0255. As of late yesterday it was up 80 pips. Overnight it languished in that zone and is now edging up slightly.

If a new trader asked me if they should go long this pair my advice would have to be no, given the egregious downtrend and the negative sentiment that weighs heavily upon the USD’s head. But I explained why I bought:

1) Its lows were attractive as support meaning I could have a tight stop
2) Bullish divergence on the 3-hour chart
3) Bullish candle coming off the bottom
4) Rounding bottom pattern on the 15-minute chart

All patterns are formed because of psychology. The rounding pattern goes from lower lows to the same lows then onto higher lows. It hints that the sellers are losing their dominance. How dollar bears could lose their dominance at a time when everyone, it seems, hates the dollar, is an interesting question.

TICS data is coming out today. “Capital drain promises more pain for the dollar,” was the quasi-poetic headline in the Wall Street Journal this morning—although the word poetry seems oxymoronic when written in the same sentence as the WSJ. So this trade could be taken out on that data alone. But my stop is set to a small profit so if I’m at risk of not being able to finance my next vacation from this trade, I’m also at no risk for losing money.

Bulkowski wrote about rounding patterns in his book, Encyclopedia of Chart Patterns. This one isn’t perfect—I’d prefer to see a steeper drop into the bottom and not the long, slow bleed that the world or Washington is inflicting. Gee, I thought Bush was gone but that’s right, it’s still the same old, same old—can anyone spell Paulson, Bernanke, and Geithner?

Looking at the 15-minute chart below you can see I’ve drawn a trend line into the drop—this is what Bulkowski calls the lead-in. I traced the rounded bottoming. Throwbacks to the trend line are not uncommon. This pair does throwback. It then marches, hopefully not frog marches, up from there. I don’t like the dip below the trend line that recently occurred. Remember, too, this is only a 15-minute chart. It’s sometimes useful for timing entries but it’s not a harbinger of a long-term future. The pair just reached 130 pips in profit so I lightened my position, taking some of my profits. As I said, TICS news may be bad for the dollar. We’ll see.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.